Stress and Taxes
by Evelyn Jacks
Taxpayers are often called upon to make
significant long-term decisions about large
amounts of money during the most stressful
times in their lives. It is not unusual, for
example, for people to acquire or deal with
significant sums upon:
Other one-time windfalls, such as unexpected
market gains, inheritances or the sizable
recovery of tax overpayments from prior years,
can deliver joy – or family discord or stressrelated
indecision. Many people may be
overwhelmed or paralyzed at these times.
Financial advisors can help by providing both
perspective and experience to guide the
“financially terrorized” back to the road to
personal and financial success.
- The death of a loved one, which can result in
life insurance payments and other asset
- Prolonged disability, which can result in the
receipt of lump-sum disability payments;
- Early retirement or job termination, which can
generate significant severance packages;
- Emigration, which can trigger asset liquidation
and departure taxes;
- Separation or divorce, which can prompt the
sale of personal residences and other assets;
- Moves to a new city, which may prompt
the sale of a family cottage as well as the
- The landing of a new job, which may bring
with it a signing bonus.
It is important to think about the tax
consequences and to revisit key tax-planning
strategies in making these decisions. Here are
some things to remember to get the most from
the tax department at times of significant
- Review eligibility for refundable tax credits. The tax system
is the first place to turn for relief when incomes fluctuate or personal
circumstances change. It is possible, for example, to enhance the monthly
income of families with children through the Canada Child Tax Benefit.
This is not something a high-income earner would think of, as he or
she may not have qualified for the credits in the past.
- Invest a severance wisely. Those changing jobs should prepare
“what if” scenarios for the investment of severance packages.
How much can be transferred on a tax-free basis to RRSPs, how much should
be taken as taxable income in a particular taxation year, and can any
of the money be deferred to the next? Taxpayers will want to maximize
RRSP contribution room and plan taxable withdrawals carefully, all the
while managing non-deductible debt and preserving capital.
- Use your losses. When a taxpayer dies, or assets are otherwise
transferred or disposed of, it is important to properly utilize capital
loss balances from prior years. Be sure the taxpayer has reported all
capital losses of prior years (an adjustment request can be made for
the previous 10-year period if this was missed). Remember, capital losses
can be used to offset capital gains of the current year, the previous
three years or indefinitely into the future.
- Maximize new tax preferences. Identify new tax deductions,
refundable and nonrefundable tax credits you may be entitled to after
a life-cycle change. This year, consider tax changes surrounding the
claiming of medical expenses for your adult dependants, for example,
as well as the latest RRSP contribution maximums and educational savings
plan contribution limits for children or grandchildren. Caregiver credits
may also be available when disabled parents move in to live with their
- Manage your RRSP. Do you really need to withdraw taxable money
to get through the current financial hurdle? Can you avoid generating
a taxable withdrawal? If there are no other options, consider withdrawing
in the hands of the lowest-income earner in the family first. If you
have received a lump-sum payment, concentrate on topping up unused RRSP
contribution room first, then plan orderly and systematic taxable withdrawals
to take you through the temporary period of difficulty. Rebalance your
portfolio according to your new risk tolerance level and objectives.
Also, consider why you need the money. With the Lifelong Learning Plan
or Home Buyers Plan, it may be possible to make a tax-free withdrawal
from your RRSP.
- RRSP withdrawals may be the right option. Those who are elderly
or confronted with a terminal illness or other life-shortening event
may need to consider their asset accumulations in a completely different
way. If income in the future or upon death will be taxed in a higher
bracket and at higher rates than today, consider making taxable withdrawals
now. Then reinvest the money in tax-efficient, non-registered investment
- Use your business start-up to generate cash flow. If you recently
started a new business, consider claiming your start-up losses within
a proprietorship rather than a corporation. Non-capital losses can be
used to offset all other income of the year. Should there be excess
losses, these can be applied back to all other income of the prior three
years or for up to 10 years in the future. This can be particularly
lucrative if you earned a high income in those previous years (or will
again in the future).
- Take advantage of reduced fair market values. Are the market
values of your assets lower than they will be in the future? This may
be a good time for intergenerational transfers or emigration –
events that are usually based on the deemed disposition of taxable assets.
Consider whether this is the time to transfer the family cottage or
other assets to adult family members for the most advantageous tax result.
Low fair market values, coupled with the ability to offset gains on
the transfer with capital losses otherwise incurred this year or in
prior years, can make tax sense.
- Claim interest costs and losses stemming from business failure.
Capital losses can be claimed when guarantees are called for investments
in now insolvent public or private corporations, when funds loaned are
not repaid, and when debts cannot be collected, provided these investments
were made with an intent to earn income. Losses on small business corporations
qualify for special tax treatment, which can result in a portion of
the losses being used to offset other income of the current year, the
three prior years or 10 years into the future. Furthermore, costs of
borrowing money to invest in companies that have now lost significant
value will continue to be possible; as CRA deems the original value
to be the base of that deduction.
- Review quarterly tax instalment payment requirements. If your
income has declined, be sure to reduce quarterly tax instalments to
accurately reflect your true income picture for the current tax year.
It is not necessary to follow CRA’s billing methodology; use Form
T1033 to estimate your correct tax liability.
- Audit problems? Seek fairness. If a tax audit results in an
expensive tax balance due, you may be able to tap into CRA’s “Fairness
Provisions” to recover errors on prior-filed returns. This can
offset your tax bill or bring significant tax windfalls your way. Your
tax advisor should scour prior filed returns for such errors or omissions.
Remember also that when financial hardship strikes, CRA has some power
of leniency. It can accept tax remittances over a period of time, instead
of in a lump sum, and even waive penalties and interest if you can show
personal hardship like death, illness, disability or other factors beyond
your control, as a reason for your tardiness in late filing, for example.
- Comply voluntarily. There can be significant penalty and interest
charges for late tax filings and payments. Don’t miss filing your
tax return even if you are short of cash. And, if you feel guilty about
“aggressive deductions” or under-reporting of income, you
can avoid tax evasion or gross negligence with voluntary compliance.
Correct your returns before CRA does.
- Going forward. Remember that it is your legal right and duty
to arrange your affairs within the framework of the law so as to pay
the least amount of taxes possible.
Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit www.knowledgebureau.com.
This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership
regarding the sale of investment products discussed herein